Column: We don't have a Social Security problem. We have a retirement-security problem.

By
Ezra Klein

For anyone who would like to retire someday, reading the news can be depressing. There's the Social Security shortfall, of course, and the reports that pensions promised to state employees are terribly underfunded. The financial crisis wiped out plenty of 401(k)s, and many families had to borrow against - or withdraw from - their retirement savings to stay afloat.

Too often, these are three separate conversations, and they're frequently lashed to other issues. Social Security is usually discussed in terms of the deficit, and Washington brims with plans for cutting Social Security benefits. The conversation over state pensions usually is really about the sustainability of state budgets. And when we talk 401(k)s, we tend to be talking about volatility in the stock market.

But really, these are all the same conversation, about the same problem: retirement security. The late 20th century saw a great shift in risk, in which uncertainty that had been borne by employers and the government was shunted onto individuals. And in our efforts to solve our deficit and economic problems, we must be careful not to make our retirement problem worse.

Consider the 401(k): When Congress created the provision in 1978, lawmakers didn't realize they were going to transform the American pension system within a generation. But that's what happened. Previously, employers had defined-benefit systems in which they had to worry about saving enough to pay for the retirement of their workers; the 401(k) - and similar defined-contribution systems - let them push that responsibility onto the workers.

By 1995, there were more 401(k)s plans than traditional pension plans. Now there are about twice as many. And they're not working out that well, Robert Hiltonsmith, a policy analyst at the think tank Demos, shows in his paper "The Failure of the 401(k)."

The failure, experts say, basically, is this: The typical worker approaching retirement needs about $250,000 in a 401(k). Most don't come close. The average is closer to $98,000 - only a bit more than a third of the recommended amount.

That's necessary context for considering the arguments over Social Security and state pensions. In both cases, most of the solutions don't solve the problem so much as switch to a different one. The costs come off the government's balance sheet but land on the backs of individual retirees. And it's not clear how those retirees are supposed to pay for it. On average, baby boomers can expect to subsist on an income of about 77 percent of what they earned in their peak working years. For Gen-Xers, it's 65 percent. And if they have the bad fortune to retire during a market slump, well, it's not clear what they'll do.

The deficit-reduction plans under consideration will accelerate this trend. Under current law, an average -income worker (that's someone making about $43,000 a year) is projected to get the inflation-adjusted equivalent of about $15,000 a year in Social Security benefits in 2050. Under the Simpson-Bowles plan, that would drop to about $12,700. That's not nothing, but it's not much. In fact, neither amount is very much. Social Security is not a generous program. It's actually among the least-generous of any developed nation, and in making it less so, we raise the question of what, exactly, seniors with insufficient retirement savings are supposed to do.

Social Security, after all, is not a minor part of most retirement incomes. For more than 20 percent of couples and 40 percent of individuals, it provides more than 90 percent of their retirement income. We can take some of those costs off the government's books, but then we need at least a theory for how seniors would make up the shortfall.

The best-case outcome is that they'll work longer, contributing more to the economy. But that's not always possible. Age discrimination is rampant. Employers know that younger workers are often more productive, and always cheaper, so they push out older workers or refuse to hire them. And once unemployed, it's particularly hard for older workers to find new jobs. It's something that's become all too clear in the current recession, which has seen a startling rise in long-term unemployment among older workers.

There are policy solutions that might work, but they require looking at retirement security as a whole and not just as a subcategory of deficit reduction. Increasing benefits for low-income seniors even as you reduce benefits for high-income seniors probably makes sense. So, too, does automatic enrollment in 401(k)s, which has been shown to vastly increase participation. Hiltonsmith supports an expanded version of the 401(k) called a "guaranteed retirement account," in which contributions from employees, employers and the government would be mandatory.

And the problem involves more than just pensions. If we want seniors to work longer, we're going to have to think harder about why so many don't. Age discrimination is often part of it, and so, too, is physical exhaustion among those with manual jobs. Many experts suggest that the typical retirement - where you go from working one day to not working the next - could be replaced by partial retirement, where workers move to more flexible, part-time arrangements as they get older.

Shifting risk is not the same as eliminating it, and sometimes can even add to it. With the rise of 401(k)s, fewer employers need to worry about pension costs, but more workers need to worry about retirement security. As Congress and state governments turn to address the solvency of Social Security and state pension systems, they need to do more than just continue moving the costs to retiring workers. We need to solve our budget problems, of course, but in a way that doesn't worsen our retirement problems.

Always remember when looking at charts such as this that terms like "couple" and "one earner" and "two earner" exclude married same-sex couples. If you're the lower income member of a same-sex couple, you'd damn well better be part of a "two earner" household, because you're absolutely excluded from survivor benefits. And, yes, that can be a very big deal, financially speaking.

"But really, these are all the same conversation, about the same problem: retirement security. The late 20th century saw a great shift in risk, in which uncertainty that had been borne by employers and the government was shunted onto individuals. And in our efforts to solve our deficit and economic problems, we must be careful not to make our retirement problem worse."

Another way to look at this is that the mid-20th century saw a temporary shift of retirement security risk from the historic norm of being the responsibility of individuals themselves to the government and employers and this is now shifting back to individuals as it is no longer sustainable for the government and the employers to provided open-ended retirement commitments in the face of competing priorities.

I am so against means testing SocSec or any government insurance or support program, becasue this creates a "beggar" class and an "elite who don't need it" class. We should, instead, tax all income (investment, retirement, earned, etc) at the same rates, pre- and post-retirement, and this would include taxing government benefits which would be treated as income, so that at a certain income level, the taxes would recover all of the benefits. No means testing means no demeaning winnowing of people via invasive bureaucratic reviews of income and assets. It would actually serve to decrease the social welfare bureaucracy, but would probably increase the IRS bureaucracy to police the rich folks who of course will try to game the system as they always do.

"Consider the 401(k): When Congress created the provision in 1978, lawmakers didn't realize they were going to transform the American pension system within a generation. But that's what happened. Previously, employers had defined-benefit systems in which they had to worry about saving enough to pay for the retirement of their workers; the 401(k) - and similar defined-contribution systems - let them push that responsibility onto the workers."

You are assuming that the enactment of the 401(k) law was the primary driver of these trends, and not in response to an existing trend away from pensions. Keep in mind that most pensions have significant vesting periods and that absent the 401(k) law what we may have ended up with was even less retirement security than we have today, given the trends of workers switching jobs more frequently than in the past and the bankruptcy of large companies and subsequent takeover their pension funds by the Pension Benefit Guaranty Corporation (PBGC) with the corresponding reduction in pension benefits.

This article once again comes out against the stock market in favor of the pro-union ideas of pensions. Its not that I have anything against this, its just that with all the companies going under and our insurance for them massively out of wack compared to the real costs, the traditional pension is not a good solution for cost savings either.

PBGC is running at a deficit of Billions of dollars. Its nowhere near self supporting.

@Natstural:
The PBGC is itself not meant to be self sufficient. It's the dumping ground for companies that haven't planned well or planned to fail or just had bad luck. It's meant to deal with just the first and last, not the second.
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By having everyone doing retirement investing for themselves, you inevitably get people who don't understand the process and end up not saving enough. Those people then end up on the govt's dime.
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Having a company provided defined benefit pension puts (hopefully) qualified people in charge of the financial investing. It also greatly reduces the area in which you would need to conduct 'oversight' since these plans are required to report their status.
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Which is more likely to cost the gov't more do you think?
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Certainly more stringent oversight needs to be in place on defined benefit plans as the ability to constantly 'postpone' the funding of the plans is exploited far too often - resulting in the overloaded PBGC you mention.

The suggestion of gradual or partial retirement over time runs up against the problem that plagues those middle-aged, long-term unemployed/unemployable. Health insurance, in particular Medicare, extended to those younger than 65, would make that age group much more "employable"; an employer wouldn't be worried about what that middle-aged employee would add to his health insurance costs, and part-time employees would be covered!

What you ignore is that defined benefit pensions don't work out for companies that disappear. The PBGC is running a $23B deficit, but it's not handling the local and state government pensions that are on the verge of blowing up.

In all honesty, I think that is the govt's message to the citizenry. If you want any kind of security at all in your life, don't be poor. That works out just fine for you and me, Ezra, with our well-paid desk jobs, our vacation plans, etc, but it is no good for the working and middle class.

If this country doesn't turn around, and fast, I will consider having my kids and raising them in another country. A country that cares about all of its citizens regardless of their income level.

Why is it not as obvious to the policy elites as it is to me that as we have grown vastly richer as a society, our retirements ought to begin earlier with more generous benefits rather than later with less?

@thehersch "Why is it not as obvious to the policy elites as it is to me that as we have grown vastly richer as a society, our retirements ought to begin earlier with more generous benefits rather than later with less?"

Go for it. Assuming you have saved up as much as you need to live on, retire as early as you want to. Just don't expect the rest of us to pay for it.

I don't understand how people can read that post as calling for us to go back to pensions. Ezra's saying that we have three problems which are often talked about as separate, but they're really all part of the same problem: what kind of retirement do we expect and how can we ensure that it is possible? We used to have guaranteed retirements through pensions that were fairly secure, at least for a time, but then we moved to plans that were more risky and placed more of that risk on the individual. As we go forward and change things like SS, etc., we need to take a wide view of what all these things are for and how will be able to achieve the best result.

Note that under the Simpson Bowles plan, a worker who earned $43,000/yr from age 22-67 wouldn't even break even on his contributions until he reached 84 years of age. If the worker died earlier, his net return on Social Security would be negative (assuming as I usually do that ~2% of the 12.4% goes to non-retirement benefits).

To earn a 1% real return, the worker would have to make it to 90 years old. A 2% return would require living to 105. Under current law, those ages would be 86 and 95, respectively.

A mix of stocks and bonds is unlikely, over a 40 year period, to return less than 3%, and we should expect a 4%-5% return after inflation given the historical record of the past several hundred years.

Consider that if the economy can't generate market returns of 2%-3%, it also won't be able to provide the meager benefits currently promised.

With a 4.5% average annual return, a person who works for $43,000 from age 22-67 can expect an annuity worth $37,000/yr (2% inflation, 6.5% expected nominal return on investments, 35 years with inflation adjustment).

Do the progressives have any argument against having workers save the 10.4% for themselves, and having Social Security make up the difference between what their savings would provide and what Social Security would provide if they slip below?

Such a plan would:

- Leave no one worse off
- Most Americans would indeed be better off
- The savings rate would rise, boosting either the capital stock or reducing the current account deficit (probably both)
- Leave the majority of retirement savings for the majority of Americans out of the reach of the whims of politicians who might well cut benefits and/or raise the retirement age
- Is property that can be passed on to heirs upon early death
- If you assume that even 50% of Americans will fall below the Social Security benefit levels with their savings account, and on average they will require 50% of the benefits that Social Security is currently scheduled by law to pay in order to be "made whole", that reduces the old age insurance outlay from ~5% of GDP to ~1% of GDP.

The only progressive arguments against that I can see are:

- Transition costs (but then again, the cost of this program over time would be lower than traditional Social Security so if the traditional program is affordable, the savings with protection program is more affordable)
- It undermines support for government involvement with retirement (probably true, but I doubt American voters would abandon safety nets entirely - a true safety net which requires modest amounts of funding is unlikely to attract much opposition, save from strong natural rights libertarians)

Why is it not as obvious to the policy elites as it is to me that as we have grown vastly richer as a society, our retirements ought to begin earlier with more generous benefits rather than later with less?

Posted by: thehersch | November 29, 2010 4:12 PM | Report abuse

maybe if you realized that we're all living longer and factored that into the equation you'd see the ENTIRE picture instead of just what you want to see.

@Will12,

there are many countries in Europe where you'll gladly be invited to join the rioting in the streets there if you like and where its now being proven day in and day out that a VAT is proven not enough when entitlements are given without much threat of reduction in benefits and when those reductions in benefits are necessitated by overconsumption of services its much easier to start an entitlement than to curb it when societies cannot afford the depth of their entitlements.

Me personally, I had three wonderful and loving children. Raised them well, educated them well, made sure they weren't saddled with debt and gave them a good start. I have no reason to expect that I will need to call upon any of them for assistance when I retire, but there's no doubt that they will be ready, willing, and more than able to do so if necessary.

So why, in Ezra's article and all of the comments is there not a single reference to family responsibility, and only a few to individual responsibility?

To solve our problems, it will require out-of-the-box type thinking -- for instance what "many experts suggest that the typical retirement - where you go from working one day to not working the next - could be replaced by partial retirement, where workers move to more flexible, part-time arrangements as they get older."

Yet the same old ideas are recycled over and over again that are not only inadequate and ineffective and have been soundly rejected by the majority of Americans they will inflict more pain on the most vulnerable amongst us.

America used to be a nation where innovative ideas and solutions were born out of common sense, pragmatism, logic and reason. That was yesterday ... today they've been replaced by political ideology and backward thinking.

Meanwhile as the rest of the world moves ahead, we're stuck in the past falling further and further behind. We'll be lucky to even catch-up at this point. But judging by the current trends, it looks like our luck has run-out.

I like Social Securities "investment plan". For 6+ percent of my wages (capped at 110K) I can purchase some disability insurance and an investment in GDP / "the wage bill increase". The return is risk free, it doesn't go down. No, it doesn't create an asset to pass to my children, but it does provide for my spouse after I pass away.

Simpson Bowles and other plans that remove wage indexing and replace it with CPI are just another prospectus for a sub-prime replacement investment instrument, one that can replace the guarantee of reasonable income security after a long work life, with a chance to explore cat-food as a cuisine.

You have got to love the salemanship even while bemoaning the rush of the rich pundit class to embrace the pain.

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